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OpenTable Shares Signaling Anxiety Over New Competitors: Retail

OpenTable Inc. (OPEN), the restaurant- reservation service that went public during the worst of the recession and saw its market value triple by the end of 2010, is reeling as investors lose their appetite for the stock.

The company’s shares have tumbled 67 percent from a record $115.62 in April amid a continued slow economy, a sluggish effort to enter the European market, and domestic competition from newer, cheaper services such as Livebookings Ltd. Google Inc., which recently purchased restaurant guide Zagat Survey LLC, is also casting a shadow over OpenTable’s shares.

“Expectations have come down materially,” said Clayton Moran, a Delray Beach, Florida-based analyst at Benchmark Co. who has a hold rating on the shares. “Growth has now decelerated, and you’ve had these added competitive concerns.”

Shares of San Francisco-based OpenTable, which went public in May 2009 at $20, trade at 46 times earnings, even after the stock’s recent declines. That’s a higher valuation than 96 percent of companies in the Standard & Poor’s 500 Index, according to data compiled by Bloomberg. The shares are at an especially “lofty” valuation considering that the company hasn’t yet proved it has a plan to maintain its market leadership, said Justin Patterson, an analyst at Morgan Keegan & Co. in Nashville, Tennessee.

Online Reservation Market

The company dominates the market for reservations in the U.S., with more than 16,000 restaurant subscribers, and may reach 20,000 in 2012, Moran said. Eatery owners pay for OpenTable’s computer system, which lets them manage table inventory and maintain a profile of customers who have dined there, on top of other fees.

Those owners include A.J. Gilbert, who runs San Francisco’s Luna Park, a restaurant serving modern American food that costs about $20 for a dinner entree. He estimates that OpenTable brings in about 60 percent of his restaurant’s reservations. Those bookings come at a price. Gilbert paid $2,351 on his last monthly OpenTable bill.

“The market is ready for some price competition,” he said. “OpenTable has kind of stumbled into this monopoly. They support their product really well. They’re just really expensive.”

Well, not really, according to Matthew Roberts, chief executive officer of OpenTable. For every $1 OpenTable charged in fees for logged reservations, diners spent an average of $43 in North America last year, he said.

Considering Alternatives

That argument is hard to make to restaurants trying to shave costs in challenging economic times. One alternative may be Livebookings, Europe’s largest online restaurant-reservation provider, which started a free service in the U.S. last month that lets restaurants enable online reservations on their own websites and Facebook pages.

OpenTable estimates it has signed up 64 percent of reservation-taking restaurants in San Francisco. The company may be hitting a wall in pushing beyond that level in the city, as well as in its other key markets such as New York, Washington and Chicago, Patterson said.

Roberts disagrees. “We’re not seeing that we’re running into any kind of wall relative to growth,” he said last month on Bloomberg Television. The company estimates it has signed on 37 percent of the 35,000 reservation-taking restaurants it has identified as its potential market in North America.

The Google Question

The question is, what will Google do? Its September takeover (GOOG) of Zagat, the review service known for its burgundy- colored restaurant guides, has already contributed to OpenTable’s share price decline. If Google decides to use Zagat to start a restaurant-booking service, OpenTable would face competition from the world’s largest Internet-search provider.

As it stands now, the company benefits from Google. In August, OpenTable said that 5 percent to 10 percent of traffic on its site comes from Mountain View, California-based Google and other affiliates, including Zagat and Yelp Inc.

“If we were to get any sense that Google was going to remove the uncertainty of it potentially doing reservations directly, it would help the stock,” Moran said.

In the meantime, a sluggish economy isn’t helping OpenTable’s prospects. An unemployment rate hovering around 8.6 percent means people may choose to dine out less, weighing on revenue. Last year, 48 percent of OpenTable’s sales came from fees it charged restaurants for seating each individual diner.

The company increased revenue just 1.7 percent in this year’s second quarter from the prior period, and sales were also little changed sequentially in the third quarter. Revenue will rise 7 percent to $36.7 million in the last three months of this year compared with the third quarter, according to the average analyst estimate compiled by Bloomberg. By comparison, OpenTable sales jumped 25 percent in the fourth quarter of 2010 from the previous period.

New Cities

The company needs to find new business in cities such as Dallas where it hasn’t yet established itself, Patterson said. International expansion has also taken longer than expected, Moran said. The company hasn’t identified what the next growth driver will be if the effort doesn’t turn around, he said.

Livebookings is its largest rival, with about 9,000 restaurant subscribers, mostly in Europe, while OpenTable logged 7,629 in its international markets, including Germany, Japan and the U.K., in the third quarter.

OpenTable bought its way into the European market in 2010 with the acquisition of Toptable.com, a restaurant-reservation service then based in London, for $55 million. The company is making Toptable’s website more user-friendly and expects it to start generating more growth in the U.K. in the second half of 2012, Roberts said.

“There’s nothing that we’ve learned that indicates London should be any different than Manhattan or San Francisco,” Roberts said in an interview.

To contact the reporter on this story: Danielle Kucera in San Francisco at dkucera6@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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